STAY ON TRACK WITH TECHNICAL ACCOUNTING
Don’t Get Spooked By The Complexities
Devin Bissessur, Assistant Director, Corporate Accounting
Technical accounting can be a very complicated subject, especially for a startup business. New entrepreneurs have innovative and inspiring ideas on how to improve their businesses with a laser focus on decisions that can take their company to the next level, and they may overlook this critical component.
However, poor technical accounting can derail the future plans of a great business. Recognizing revenue too early, a lack of proper internal controls and improper recognition of financial instruments can result in significant costs, legal charges, and overall stress for the management of a company.
IMPACT OF INSUFFICIENT TECHNICAL ACCOUNTING PLANNING
The lack of technical accounting and planning has resulted in numerous issues for both startup and mature businesses. The result of U.S. Securities and Exchange Commission (SEC) charges can significantly impact the future success of a business and the founder’s reputation in their industry. Below are some recent examples of charges due to the lack of technical accounting oversight and governance:
- July 3, 2023: Future FinTech Group (FTFT) was charged by the SEC for filing materially inaccurate annual reports and failure to maintain internal control. It was discovered that the assets should have been impaired earlier, and ASC 360 (Property Plant and Equipment) was not followed. The SEC ruled that the personnel did not have proper expertise in GAAP and SEC reporting requirements.
- June 27, 2023: Las Vegas-based supplement company MusclePharm executives were charged by the SEC for prematurely recognizing revenue early for orders that did not transfer to the customer. In addition, the SEC stated that customer credits were misclassified as advertising revenue instead of reductions to revenue.
- August 3, 2022: The SEC charged Suralign Holdings with improper revenue practices to recognize revenue earlier than required which violated US GAAP ASC 606 (Revenue) guidance. The result was a $2M fine and charges against the executives.
TECHNICAL PLANNING FROM INCEPTION
A startup can avoid costly adjustments, audit fees, and general stress if the right technical guidance is provided from the beginning. Technical accounting includes the following functions:
- INTERPRETING ACCOUNTING STANDARDS. Understanding the detailed guidance provided by US GAAP accounting standards on specific transactions or financial statement presentations. Accounting guidance is constantly changing, and being ahead of the curve can reduce errors and costly misstatements. The following are examples of technical topics that affect new businesses:
- Treatment of Simple Agreement for Future Equity (SAFE) notes on the Balance Sheet
- Change to the disclosure of Cryptocurrencies on the Balance Sheet
- ASC 730 Capitalization of R&D expenses
- ASC 606 Revenue Recognition
- ASC 810 Consolidations
- COMPLEX TRANSACTION ANALYSIS. Analyzing and determining the appropriate accounting treatment for complex business transactions. This could include mergers and acquisitions, financial instruments, and revenue recognition for complicated contracts. Proper analysis can unlock cost savings in a transaction and improve disclosures which potential investors would find attractive.
- FINANCIAL REPORTING. Preparing and reviewing financial statements to ensure compliance with applicable accounting standards. Appropriate historical compliance will ensure the IPO process will be quicker and less costly. Proper financial reporting will be easier to read and attractive to potential investors and underwriters.
- RESEARCH AND DOCUMENTATION. When faced with unique or complicated transactions, technical accountants often must research the relevant accounting standards or seek guidance from professional bodies or advisory firms. They then document their findings and the rationale behind the accounting treatment chosen.
- LIAISING WITH AUDITORS. Technical accountants interact with external auditors, explaining and defending the company’s application of accounting standards.
- STAYING COMPLIANT. Accounting standards can evolve, and new ones can be issued. Technical accountants must stay updated on these changes and understand their implications.
Investment into technical accounting can be a tremendous benefit to a business of any size who has strong growth plans. Early recognition and compliance with accounting guidance can avoid costly mistakes and keep startups on track, ensuring the management team can focus on their business and be a leader in their industry.